The government today decided to guarantee Air India's non-convertible debentures
(NCDs) worth Rs 7,400 crore, which will pave the way for the ailing carrier to pay off its short-term loans.

"The Ministry of Finance has approved the unconditional and irrevocable guarantee for Air India NCD bonds today for Rs 7,400
crore," an Air India spokesperson said.

Air India is burdened with a huge debt of over Rs 43,000 crore, which is a mix of long and short-term debt and working capital loans.

The airline will now credit rate the NCD bonds based on the guarantee issued by the government. The national carrier was banking heavily on NCDs sale to ease the interest cost on the expensive working capital loans.

"The proceeds of the NCD would be used to repay the short- term working capital facility availed by Air India from the 19 banks," the official said.

The debt-laden national carrier needed to issue the bonds as part of its financial restructuring plan but it had earlier hit a roadblock after the Finance Ministry refused to give "unconditional guarantee".

The NCD would have a tenure of 19 years and priced at a spread over the applicable government security. The government has capped the spread at 70 basis points, the official said.

"Air India would also be able to save on the interest cost by retiring this debt. The Banks would now have a reduced exposure to Air India after the said short-term loan is paid out by the national carrier," he said, adding the airline was targeting to achieve this within two to three weeks from the date of receipt of the sovereign guarantee.

In April this year, 19 lenders of Air India approved a financial restructuring plan which envisaged equity infusion of about Rs 23,000 crore into the airline over the next 10 years by the government as a stakeholder.

Also there would be restructuring of Rs 22,000 crore of its high cost working capital debt. Of this, the banks had agreed for a conversion of Rs 10,500 crore to long-term loans and the rest, Rs 7,400 crore was to be returned to the banks through bond sale.

"AI's restructuring programme was on track with the airline achieving the milestones set under the Turn Around Plan. Air India was expected to tap provident or pension funds, financial institutions, Employee Provident Fund Organisation
(EPFO) and other sources to raise the money," the official said.